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Our Eurobond Political Risk Monitor, presented in the attached table, provides a quick go-to guide of the main political and policy issues in 17 sub-Saharan African (SSA) sovereigns that have issued Eurobonds as of July 2020. In this edition, our ‘Spotlights’ section is dedicated to a single issue – the G20’s Debt Service Suspension Initiative (DSSI), because of how dramatically the Covid-19 pandemic is sharpening debt dilemmas confronting the majority of SSA sovereigns.
Please click on ‘View PDF‘ below to access the full Monitor.
Sub-Saharan Africa: Debt relief debates in the wake of the Covid-19 pandemic
The pandemic deals a severe blow to sovereigns’ public finances across sub-Saharan Africa (SSA) and risks wiping out much of the socio-economic progress recorded since the turn of the millennium. Amid a persistent climate of uncertainty, the IMF in its June 2020 regional economic outlook forecasts that regional GDP will contract on average by 5.4% on a per-capita basis this year.
As early as 31 March, SSA finance ministers had been calling for mass-scale international pandemic support amounting to USD 100bn, including an “immediate waiver of all interest payments on all debt estimated at USD 44bn for 2020 with possible extension to the medium term,” referring to official debt owed to governments, multilateral institutions, and sovereign bondholders. While multilateral bodies including the IMF, the World Bank and the UN Economic Commission for Africa quickly embraced the idea, the initial reaction of most key donor countries – with the notable exception of France – was more reserved.
The Debt Service Suspension Initiative (DSSI) eventually presented by the G20 finance ministers on 15 April revolves around the lowest common denominator, while the bandwidth and willingness to engage with ‘out-of-the-box’ initiatives to tackle developing countries’ debt appears limited to date. Eligibility to participate in the six-month moratorium on sovereign debt payments to G20 countries, which might be extended before the end of the year, is confined to narrow, technical criteria. Furthermore, the terms under which G20 members beyond the Paris Club – notably China, the single most important bilateral creditor to SSA – will participate in the initiative remain shrouded in secrecy.
While the G20 exhorted private creditors to participate in the initiative on “comparable terms,” the impression has gradually hardened that such participation will not be forced. In a 1 May communique, the Institute of International Finance (IIF) stressed that any private sector participation must be voluntary; that each participating creditor will need to assess “NPV neutrality” (as envisaged in the G20 statement) independently; that any participation must comply with the entity’s fiduciary duty; and that contract-by-contract negotiations may be required for any debt stand-still; and warned participating sovereigns about “the potential consequences for market access when requesting debt service suspension.”
As of 6 July, the applications of 12 SSA countries for DSSI debt relief, including four Eurobond issuers (Cameroon, Republic of Congo, Cote d’Ivoire and Ethiopia) have officially been approved (see map). Yet it appears that persistent warnings from private sector creditors as well as Moody’s decision to immediately put rated issuers applying for DSSI on review for downgrade have dissuaded others, including Kenya and Nigeria, from applying. As a result, deferral agreements might be one-off and ad hoc, rather than broad-based and systematic. Nevertheless, the less comprehensive the debt response, the greater the need could be for large-scale restructurings and the risk of disorderly defaults going into 2021. In fact, if G20 governments conclude that the ‘lesson learned’ from this year’s DSSI push is that the voluntary approach with private creditors does not work, they could tighten their provisions when the bigger debt relief debate comes into focus next year.